5 Undervalued Companies for the Defensive Investor Near 52 Week Lows – December 2014

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There are a number of great companies in the market today. By using the ModernGraham Valuation Model, I’ve selected the five undervalued companies reviewed by ModernGraham trading closest to their 52 week low. Each of these companies has been determined to be suitable for the Defensive Investor according to the ModernGraham approach. Defensive Investors are defined as investors who are not able or willing to do substantial research into individual investments, and therefore need to select only the companies that present the least amount of risk. Enterprising Investors, on the other hand, are able to do substantial research and can select companies that present a moderate (though still low) amount of risk.

Be sure to check out the history of this screen to see which companies have been selected in the past.

Helmerich & Payne Inc. (HP)

logo_HPIHelmerich & Payne is suitable for either the Defensive Investor or the Enterprising Investor.  In fact, the company passes all of the requirements of both investor types, which is a very rare accomplishment.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.99 in 2010 to an estimated $5.58 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 3.11% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.  (See the full valuation)

National-Oilwell Varco Inc. (NOV)

National_Oilwell_Varco_Logo.svgNational Oilwell Varco qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor’s only initial concern is the short dividend history while the company passes all of the Enterprising Investor’s requirements. Consequently, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review of Baker Hughes Inc. (NYSE:BHI).

From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.88 in 2010 to an estimated $5.53 for 2014, an overall growth rate of around 8.55% annually. National Oilwell Varco’s growth in its EPSmg demonstrates a long-term trend in the company’s earnings, a sight that value investors love to see. Overall, EPSmg has grown in each of the last five years, and it should be expected that growth will continue into the future. This level of demonstrated growth outpaces the market’s implied estimate of 2.81% earnings growth.

The ModernGraham valuation is based on an estimate of growth of 6.41%. As a result, it is clear that the market’s current pricing of National Oilwell Varco may be low, and therefore the ModernGraham conclusion is the company appears to be undervalued.  (See the full valuation on Seeking Alpha)

Chevron Corporation (CVX)

500px-Chevron_Logo.svgChevron Corporation passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The Defensive Investor’s only concern is the low current ratio while the Enterprising Investor is willing to overlook concerns because the company passes the more conservative Defensive Investor requirements. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $8.58 in 2010 to an estimated $11.38 for 2014. This is a fairly strong level of demonstrated growth which is well above the market’s implied estimate for earnings growth of 0.81% over the next 7-10 years. In fact, the historical growth is around 6.53% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, and therefore returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.  (See the full valuation on Seeking Alpha)

Coach Inc. (COH)

Official_Coach_Inc_LogoCoach is an outstanding company for consideration by both Defensive Investors and Enterprising Investors. The only concern either investor type has is the Defensive Investor’s concern about the short dividend history. Other than that, the company passes all of the requirements with flying colors. As a result, both investor types should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

The company has grown its EPSmg (normalized earnings) from $2.01 in 2010 to an estimated $3.26 for 2014. This demonstrates the company has achieved a strong level of growth, a fact supported by the company’s growth in regular EPS from an average of $1.32 for the period of 2005-07 to an average of $3.44 for the period of 2012-14. This strong level of demonstrated historical growth leads the ModernGraham valuation model to estimate a growth rate of 9.37% over the next 7-10 years. Though this is a high figure, the company has achieved a growth rate of 12.49% over the historical period under review. As a result, the company could see a downturn in its growth and still achieve the ModernGraham growth estimate.

The model then utilizes Graham’s formula to return an estimate of intrinsic value of $88.84, which is well above the market’s current price of the company. In fact, even with a growth rate estimate of only 3% over the next 7-10 years, the company’s value would be $47.30, which is still above the market’s current price. Value investors are therefore encouraged to proceed with further research to determine whether Coach Inc. is suitable for their own individual portfolios.  (See the full valuation on Seeking Alpha)

Joy Global Inc. (JOY)

2012_JGI_logo_wikipediaJoy Global Inc. achieves the rare feat of passing all of the requirements of both the Defensive Investor and the Enterprising Investor, so neither investor type has any initial concerns with the company.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.89 in 2010 to an estimated $4.85 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 1.08% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.  (See the full valuation)

What do you think?  Are these companies a good value for Defensive Investors?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author held a long position in Coach Inc. (COH) but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing those holdings within the next 72 hours.


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